Tag Archives: SILO

On May 22, Altria announced that it executed a closing agreement with the Internal Revenue Service settling the federal income tax treatment of fourteen years of leveraged lease transactions (commonly known as lease-in/lease-out (LILO) and sale-in/lease-out (SILO) transactions) entered into by Altria’s wholly-owned subsidiary, Philip Morris Capital Corporation.

Altria had defied the IRS challenges to these transactions in a number of pending cases. In October 2006, Altria filed a complaint in the United States District Court for the Southern District of New York to claim refunds related to its LILO and SILO transactions for 1996 and 1997. In July 2009, following an eleven day trial, a jury returned a unanimous verdict in favor of the IRS. Altria filed motions for judgment as a matter of law or, in the alternative, for a new trial. On March 17, 2010, the court denied Altria’s post-trial motions and, on April 19, 2010, entered final judgment in favor of the IRS.

According to the press release issued by Altria, the settlement included the 1996 through 1999 tax years and tax years through 2003, in all of which the IRS had disallowed the tax benefits claimed from these transactions. The settlement also covered the tax years 2004 through 2009 for which Altria claimed tax benefits generated by the LILO and SILO transactions but which the IRS was expected to disallow. Altria did not claim tax benefits pertaining to the LILO and SILO transactions in the 2010 and 2011 tax years and, under the terms of the settlement agreement, will not claim such benefits in future tax years.

Altria expects to pay approximately $450 million in federal income taxes and related estimated interest with respect to the 2000 through 2010 tax years. The payment is net of federal income taxes that Altria paid on gains associated with the sales of assets leased in the LILO and SILO transactions from January 1, 2008 through December 31, 2011. Of the $500 million, Altria also expects to pay approximately $50 million of state taxes and related estimated interest. The tax component of these payments represents an acceleration of federal and state income taxes that Altria would have otherwise paid over the lease terms of the LILO and SILO transactions. Pursuant to the settlement agreement, the IRS will not assess penalties against Altria for the LILO and SILO transactions in any tax year, open or closed, through the 2010.

The Second Circuit Court of Appeals affirmed the trial jury’s decision denying Altria Group’s claim for a tax refund based on four sale in, lease out (SILO) and lease in, lease out (LILO) transactions in 1996 and 1997.

The jury denied the tax refunds based on the judicial theory of substance over form. The district court denied Altria’s post trial motions to overturn the verdict as a matter of law and for a new trial. What is notable about this case is not only that the Second Circuit affirmed the jury decision but affirmed the application of the substance over form doctrine as the rationale for the decision. Prior to this decision, these transactions and other similar transactions have largely been decided under the economic substance doctrine.